Taiwan's tech sector posts historic production decline

TAIPEI, Taiwan  Taiwan's production of information technology hardware experienced its first ever year-to-year decline in the first quarter, and a leading analyst firm has reversed its earlier estimates for 15 percent growth and said IT production this year will instead contract by 0.3 percent.

Taiwan's high-tech sector is coming off a dour week as a flood of recent quarterly earnings reports have delivered mostly depressing assessments of last quarter. The current quarter isn't expected to hold much hope either. Few analysts foresee an uptick in end-user demand that would help burn off excess inventories.

Across the board, Taiwan's tech companies have confirmed the end of Web-speed growth rates for revenues and profits. Year-on-year profits at Advanced Semiconductor Engineering were down 76 percent, to $10.7 million; at chip set makers Silicon Integrated Systems and Acer Labs, net losses equaled $5.2 million and $4.2 million; memory maker Nanya reported losses of $50 million. Taiwan Semiconductor Manufacturing Co. Ltd., despite boosting year-on-year results, suffered a sharp 26 percent quarter-to-quarter revenue decline. On Friday (April 27), the foundry predicted another 26 percent decline for the second quarter and said it would have a thin operating margin of about 5 percent.

"It's worse than we expected," said Cynthia Chyn, a PC industry consultant with the Market Intelligence Center (MIC), which tracks trends in Taiwan's IT sector. "The U.S. slowdown is more severe and although we believe there will be a slight gain in market demand we don't think the year will end in growth for Taiwan."

An annual decline in IT production, no matter how slight, would be another first for Taiwan since it made IT its darling industry. The MIC reversed an earlier estimate of a 15 percent production increase and has stated that industry must brace for a slight loss, with total production for the year valued at $41 billion. In the first quarter, IT value posted a historic year-to-year drop of 10 percent to $8.5 billion.

Island drag

The lackluster performance is dragging down Taiwan's entire economy, which relies heavily on technology for growth. Earlier last week, the Taiwan Economic Research Institute lowered its forecast of annual gross domestic product growth from 5.69 percent to 4.75 percent. In the first quarter, the institute estimated GDP year-on-year growth was a slim 3.3 percent, a record low. And April exports and imports are expected to swing into double-digit declines.

Through the first few months of this year, it seemed like Taiwan's notebook industry might be a bright spot in the slowing IT sector. Quanta, Taiwan's top notebook PC maker, boasted big increases in unit shipments and said the slowdown would provide an outsourcing boost to its bottom line. While true, the island's notebook makers have fared poorly overall. "The product mix of notebook shipments are tending to have a higher proportion of lower-priced units with simpler features so the production value drop is sharp," Chyn said.

Indeed, the notebook PC industry experienced an 18 percent decline in the value of units shipped and a 6 percent drop in volume in the first quarter. Close behind was the monitor sector, with a 15 percent decline in the value of its first-quarter shipments. The desktop PC sector shrunk 11 percent, and mobile phone makers have slashed 2001 sales estimates by 20 percent to 50 percent. The best performing sector was for PC motherboards, which reported a 9 percent increase in value and a 12 percent increase in production during the first quarter compared to the same time last year.

But that kind of growth isn't expected to last as the traditionally slow second quarter chips away at earlier gains. Analysts and industry executives are maintaining generally negative opinions of the short-term outlook and are still pinning hope on the fourth quarter. "But any estimate is just a wild guess," said Henry Wang, an electronics industry researcher at Entrust Securities. "The visibility for the second quarter is not so clear for the IC design houses, notebook makers and motherboard makers. TSMC and UMC think the second and third quarter will be the bottom, but that could just be blind hope."

But the kick-in of seasonal demand at the end of the year is what TSMC is betting on. A similar catalyst helped spur it out of a downturn in 1998, when its utilization rate bottomed out at 58 percent in the third quarter of that year.